Introduction
Charles Munger is not just Warren Buffett’s partner in Berkshire Hathaway. He is among the sharpest thinkers in the realm of investing and decision-making. If Buffett is the actual face of value investing, Munger is the brain behind the scenes, steeped in critical thinking, mental models, and the psychology of human misjudgment.
Munger is one of the very few who is obsessed with understanding how people think-and how they often think wrong.
This blog will navigate through detailing Charles Munger’s 24 faculties of behavioral bias, breaking them down in simple terms, and application hacks for sharpening your thinking in life and investing. In some parts, we will discuss inversion, second-order thinking, the latticework of mental models, and even more.
Put on your seat belt; you are about to supercharge your brain.
Table of Contents
Charles Munger
- Financial executive at Berkshire Hathaway
- Billionaire investor and lawyer
- Disciple of multidisciplinary thinking
- Most famous for elucidating mental models and rational thinking
Munger is a believer that making decisions with greater accuracy requires understanding how your brain tricks you. And thus begins a more credible thought model through a variety of disciplines: psychology, economics, and engineering.
What Are Mental Models?
Mental models refer to frameworks and ways of looking at the world. Charles Munger recommends these models be built as a latticework composed of many various disciplines, including physics, biology, psychology, and mathematics, contributing to better decision-making.
It’s like having a big toolbox in your mind. The more tools you possess, the better the decisions you make.
Charles Munger and the 24 Behavioural Biases (Explained Simply)
Munger outlined these in a talk called “The Psychology of Human Misjudgment.” Here’s each one in simple, relatable terms:
- Reward and Punishment Super-Response Tendency People respond strongly to incentives. If you want to understand behavior, follow the incentives.
Example: Salespeople push products that offer bigger commissions, even if they’re not the best for the customer.
- Liking/Loving Tendency We favor people we like and tend to ignore their flaws.
Example: Trusting a friendly person’s advice—even if they’re wrong—just because you like them.
- Disliking/Hating Tendency We reject opinions or ideas from people we dislike, even if they’re valid.
Example: Ignoring sound advice from a political opponent just because you dislike them.
- Doubt-Avoidance Tendency In moments of stress or confusion, we rush to eliminate doubt—even with poor logic.
Example: Making quick, bad decisions during a stock market crash.
- Inconsistency-Avoidance Tendency We dislike changing our beliefs or habits, even when proven wrong.
Example: Holding onto a bad stock because selling it means admitting a mistake.
- Curiosity Tendency: Humans naturally want to explore and learn.
Munger says you should actively nurture this trait. Curiosity fuels long-term thinking and continuous learning.
- Kantian Fairness Tendency: We crave fairness. Unfair treatment often leads to overreactions.
Example: Investors are dumping stock because they think management compensation is unfair.
- Envy/Jealousy Tendency: We compare ourselves to others constantly.
Example: Buying a stock just because a friend made money from it, without researching it yourself.
- Reciprocation Tendency We feel obligated to return favors.
Example: Buying from someone who gave you a free trial, even if there’s a better deal elsewhere.
- Influence-from-Mere-Association Tendency We link ideas or emotions based on association.
Example: Believing a product is good because a celebrity uses it.
- Simple, Pain-Avoiding Psychological Denial. We ignore painful truths.
Example: Not checking your portfolio after a market crash because it hurts too much.
- Excessive Self-Regard Tendency: We overestimate our skills and knowledge.
This is why Munger stresses knowing your circle of competence—stay in areas you truly understand.
- Over-Optimism Tendency We’re naturally too hopeful, especially when emotionally involved.
Example: Believing a struggling startup will turn around just because you’re invested in it.
- Deprival Super-Reaction Tendency: Losing something triggers a stronger reaction than gaining the same thing.
Example: Refusing to sell a losing investment because it feels like a bigger loss than it is.
- Social Proof Tendency: We follow the crowd.
Example: Buying a stock just because “everyone on Twitter is buying it.”
- Contrast Misreaction Tendency: We misjudge based on comparisons.
Example: A ₹30,000 watch seems like a steal after seeing a ₹3 lakh one—even if it’s still overpriced.
- Stress-Influence Tendency Under stress, we revert to our worst thinking habits.
Example: Panic selling or buying without research during volatile markets.
- Availability-Misweighing Tendency: We give more weight to what’s easily available or recent.
Example: Investing in a sector just because it was in the news.
- Use-It-or-Lose-It Tendency: Skills fade if not used.
Munger says to keep learning and applying your knowledge consistently. Otherwise, it fades.
- Drug-Misinfluence Tendency Our judgment gets clouded under the influence of drugs or substances.
Not just literal drugs—addiction to fast money or social media can also cloud judgment.
- Senescence-Misinfluence Tendency Our mental abilities decline with age—unless we actively fight it through reading, learning, and critical thinking.
- Authority-Misinfluence Tendency: We obey authority even when it’s wrong.
Example: Taking a financial advisor’s bad advice just because they seem “expert.”
- Twaddle Tendency: We waste time on nonsense.
Munger: “You don’t have to pee on every fire hydrant.”
Focus your energy where it matters.
- Reason-Respecting Tendency We like explanations—even if they’re wrong.
Example: Believing a complex-sounding investment plan just because it sounds “rational.”
Applying These Biases: How Munger Thinks Differently
Munger uses tools like:
- Inversion: Instead of asking, “How can I succeed?” ask, “How can I fail?” Then avoid those mistakes.
- Second-Order Thinking: Don’t just look at immediate effects—think about long-term consequences.
- Probabilistic Thinking: Consider the odds and base your decisions on risk vs reward.
- Circle of Competence: Stick to what you understand. Outsmarting others starts with knowing your limits.
Munger’s Investing Style: Value Investing with a Rational Mind
At Berkshire Hathaway, Munger and Buffett aren’t just number crunchers—they look for:
- Companies with strong fundamentals
- A wide moat (competitive edge)
- A fair price with a margin of safety
- Long-term thinking and patience
They know the power of compounding—letting money grow over time—and avoid chasing quick returns.
The Importance of Temperament
Munger once said, “A great investor has a good temperament, not just a good IQ.”
In other words, you need:
- Patience when markets are boring
- Discipline when markets are euphoric
- Courage when markets crash
Charles Munger’s approach to rationality isn’t about being cold—it’s about being calm and clear-headed.
Why a Multidisciplinary Approach Matters
Munger’s secret sauce? He doesn’t just study investing.
He borrows concepts from:
- Psychology (to understand human misjudgment)
- Mathematics (to understand probabilities)
- Biology (to understand systems and evolution)
- History (to avoid repeating mistakes)
That’s the latticework of mental models. It helps him see problems from multiple angles.
Key Takeaways from Munger’s 24 Biases
- Your brain has blind spots—and they’re dangerous in investing and decision-making.
- Recognise these biases in yourself and others to avoid traps.
- Use inversion, second-order thinking, and your circle of competence to make better decisions.
- Keep learning across subjects—Munger says that’s the best way to stay sharp.
Conclusion
Charles Munger wisdom isn’t flashy but is nonetheless timeless. You can become a good decision-maker—not just in investing but also in life—by studying human behaviour and building a strong latticework of mental models, which will protect you from cognitive biases.
Charles Munger approach teaches us that intelligence isn’t about knowing everything-it’s about thinking clearly, acting rationally, and staying patient.
To think better, live smarter, and invest wiser: begin with Munger’s 24 biases and continue learning.
Are you ready to adopt Munger-style thinking for your financial future? Contact the expert advisors at BFC Cap for personal investment strategies rooted in discipline, critical thinking, and long-term growth.
Please share your thoughts on this post by leaving a reply in the comments section. Contact us via phone, WhatsApp, or email to learn more about mutual funds, or visit our website. Alternatively, you can download the Prodigy Pro app to start investing today!
Why is inversion important?
It helps you solve problems backwards-by identifying what not to do so you won’t fail.
What’s the distinction between a mental model and a cognitive bias?
Mental models are thinking tools. Cognitive biases are thinking errors. Munger teaches us to reduce biases and improve models.
How does Munger remain so sharp beyond age 90?
He reads constantly, thinks independently, and questions everything, including his own beliefs.
Isn’t this just about investing?
No. These principles apply to life, careers, relationships, and decision-making in general.
Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
Assistant Vice President – Research & Analysis
Akash Gupta heads the Research & Analysis department at BFC CAPITAL, where he combines in-depth market insights with strategic analysis. He holds multiple certifications, including:
- NISM-Series-XIII: Common Derivatives Certification
- NISM-Series-VIII: Equity Derivatives Certification
- NISM-Series-XXI-A: Portfolio Management Services Certification
- IRDAI Certification
With his expertise in equity, derivatives, and portfolio management, Akash plays a key role in providing research-backed strategies and actionable insights to help clients navigate the investment landscape.
